IT was in the midst of
the experiences described in the last chapter that the earliest of
Scottish banks came into existence, and passed the first few years of
its career. On the 17th July 1695, three weeks after the incorporation
of the African and Indian Company, the Scots Parliament passed an "Act
for erecting a Publick Bank," [The quotations are from a print dated
1695.] which, together with six other Acts subsequently obtained, forms
the constitution of the Bank of Scotland. The preamble recites how " Our
Soveraign Lord, considering how useful a Publick Bank may be in this
Kingdom, according to the custom of other Kingdoms and States; and that
the same can only be best set forth and managed by Persons in Company
with a Joynt Stock, sufficiently indued with these Powers, and
Authorities, and Liberties, necessary and usual in such Cases; Hath
therefore Allowed, and, with the Advice and Consent of the Estates of
Parliament, Allows a Joynt Stock, amounting to the Sum of Twelve Hundred
Thousand Pounds [Scots] Money, to be raised by the Company hereby
Established for the Carrying and Managing of a Publick Bank. And further
Statutes and Ordains, with Advice foresaid, That "certain persons named
should have power to receive subscriptions from the 1st November to the
1st January succeeding, and that the subscribers "are hereby Declared to
be One Body Corporat and Politick, by the Name of the Governour and
Company of the Bank of Scotland."

After sundry provisions
regarding the election of office-bearers, and the general management of
the bank, and other matters, it is enacted that during the space of
twenty-one years "the Joynt Stock of the said Bank continuing in Money,
shall be free from all Publick Burden to be imposed upon Money," and "it
shall not be Leasom to any other Persons to enter into and set up an
distinct Company of Bank within this Kingdom, besides these Persons
allenarly in whose Favours this Act is granted." That the bank would
issue notes was recognised, without specification of powers, by the
provision "And sicklike, it is hereby Declared, that summar Execution by
Horning, shall proceed upon Bills or Tickets drawn upon, or granted by,
or to, and in Favours of this Bank."

They were debarred from
any "other Commerce, Traffick, or Trade with the Joynt Stock ... or
Profits arising therefrae, excepting the Trade of Lending and Borrowing
Money upon Interest, and Negotiating Bills of Exchange allenarly and no
other," and from lending to or otherwise financially assisting the
Crown, except where "a Credit of Loan shall happen to be granted by Act
of Parliament allenarly." The Act concludes with the provision " that
all Forraigners, who shall joyn as Partners of this Bank, shall thereby
be and become Naturalised Scots-men, to all Intents and Purposes
whatsoever."

Among the names mentioned
in the Act are several which also appear in the African and Indian
Company's Act; but there is one notable exception.' Seven London
merchants are included in the list, of whom the names of John Holland
and Thomas Coutts are specially interesting. But William Paterson, the
founder of the Bank of England, the foremost Scotsman of the time in the
domain of finance, he who, according to a contemporary poet, could
"persuade a nation bred to war to think of trade," is too busy leading
his countrymen on a will-o'-the-wisp chase to interest himself in a
matter which far more concerned his country's good than all his dreams
of foreign wealth. He even appears to have viewed the banking project
with disfavour, but for what reason is not apparent.

To whom the credit for
the original idea of a bank in Scotland is due seems unascertainable;
but it is understood that Mr. John Holland, whose name is inserted in
the Act, a merchant in London, drew up its constitution at the request
of several Scotchmen resident in London. At the outset, the governor and
one-half of the directors were elected from among the proprietors
resident in London, the deputy-governor and the other half of the board
being chosen from among the Scottish proprietors. Mr. Holland was the
first governor. Subsequently, from want of interest in the bank leading
to a gradual decrease in the number of English proprietors, the practice
of electing London directors was abandoned. Mr. Wenley says: "It would
appear that Mr. Holland's Scotch bank had not found much favour with his
English friends; but there can be no doubt that, under his care, it had
been judiciously planted, and had fairly taken root." [Journal of
Institute of Bankers, vol. iii. p. 121.]

Although, as we have
seen, the Bank of Scotland got its credentials on 17th July 1695, it was
not until the new year that the share-subscriptions were completed, and
the bank actually commenced business. The capital was subscribed for in
the proportions of two-thirds in Scotland and one-third in London. The
payments on application for stock, amounting to £10,000 sterling, or 10
per cent of the subscribed capital, sufficed for the bank's
requirements. They began at once to issue notes of £100, £50, £20, £10,
and £5 sterling; and in 1704 they adopted a £12 Scots (value £1
sterling) denomination. It is somewhat extraordinary that, at the
outset, the notes should not only have been in English currency, but of
such high denominations. The number of people who could have had use for
the larger of these amounts must have been very small; and even £5 would
be an unattainable sum for most of the population. The explanation is,
doubtless, as suggested in the letter referred to below, [It is stated
in the Historical Account that, in January 1699, they adopted a 20s.
issue. The author subsequently, however, enumerates only the first five
denominations as current in 1700; and his statement is otherwise
unconfirmed. That it is probably an error is apparent from an
interesting official letter printed in Appendix A. The notes, we are
told, were then "engraven in one and the same character, only the
amounts being different."] that the bank was dominated by the views of
people accustomed to the conditions of business in London. Hence also
the hesitation of the bank, until 1704, to issue small notes, which were
essential to the efficiency of the circulation.

At first the lending of
their capital and the issue of notes constituted the whole of their
business, but very soon they attempted to engage in exchange business,
for we find that in this first year of their active existence (1696)
they established branches at Glasgow, Aberdeen, Dundee, and Montrose. It
is possible that the immediate cause of this movement was an attempt
made by the African and Indian Company to engage in the business of
banking, as a set-off to their failure in Darien, and the unremunerative
nature of their other commercial ventures. This action was, of course, a
direct infringement of the legal monopoly of the bank, justifiable only
by a literal interpretation of the prohibitory clause of the bank's Act,
which forbade the setting up of "a distinct company of bank." Not
feeling themselves strong enough, however, to contest the point, the
bank allowed their opponents to carry on their competition undisturbed;
and very soon it was found that the latter were as unable to command
success in banking as in their legitimate business, and they retired
from the field. "They resolved," says our author, "not to quarrel with
that (then) Mighty Company, nor plead the Bank's seclusive Privilege;
but rather to ly by for a little, and only so to manage their Affairs,
as not to suffer an Affront in their Infancy, by a Demand on the Bank
greater than the Amount of their Cash: And this they did effectually,
but with some Loss to the Company; for it obliged the Proprietors to
advance two Tenths of their Stock, besides the Tenth paid in at
subscribing, and put a stop to all Negotiations for a Time" (p. 4). In
the year succeeding the establishment of the bank's branches, the
directors, finding [Parliamentary Report, 1841.] that the expense of
conducting them greatly exceeded the profit obtained, withdrew them, and
the attempt was not renewed during the currency of their monopoly. To
meet their extended operations they had increased the paid-up capital to
£30,000; but when they again confined their business to Edinburgh, it
was reduced (May 1698) to the former amount by repayment of £20,000 to
the proprietors.

In February of the year
1700, they had the misfortune to be burned out of their office, which
was situated in Parliament Close, but, while the event occasioned alarm
and inconvenience at the time, they do not seem to have sustained much
injury therefrom. It was not long, however, before their affairs assumed
a grave aspect. The issue of notes had doubtless proved a great boon to
the public, as well as a source of profit to the bank, but the use of
them was not at this time so general as it afterwards became. As an
addition to the currency they were acceptable; but coin was still the
recognised medium. In 1704 a scarcity of coin, occasioned by a
persistent drain of bullion (probably to meet the foreign payments of
England in connection with the wars under Marlborough, who gained his
great victory over the French at Blenheim in August of this year), began
to be severely felt. A rumour "that the Privy Council was to cry up the
value of species," as it was quaintly termed, brought matters to a
crisis with the bank. In the words of an official print, dated 28th
December 1704, and styled a "Memorial and Intimation from the Governour
and Coy. of the Bank of Scotland," these circumstances "occasioned a
very great, unexpected, and unaccustomed demand upon the bank, which at
last had such effect, that on Munday the 18th of this instant December
the money in the Bank was wholly exhausted, and thereby payments stopt."
Thus, in language contrasting strangely with the euphonious circulars in
which firms now announce their inability to meet the demands of
creditors, did the directors of the Bank of Scotland intimate that they
had suspended payment.

Confident, however, in
the perfect solvency of the corporation, they proceeded to state that
application had been made to the Marquis of Tweeddale, the Lord High
Chancellor, craving an inspection of the books. Thereupon the Earl of
Loudoun, Lord Belhaven, the Lord President of the Court of Session, and
others, met at the bank, and after examination they "find that the Bank
hath sufficient Provisions to satisfie and pay all their outstanding
Bills and Debts; and that with a considerable Overplus, exceeding (by a
fourth part at least) the whole foresaid Bills and Debts." A general
meeting of the adventurers was called, who sanctioned the allowing of
"annual rent" on the notes "from the stop," to procure their continued
currency, and made a call of 10 per cent on the nominal capital,
amounting to £10,000. This sum was repaid two years later. With these
arrangements the difficulty was overcome, and the bank learnt its first
lesson in the absolute necessity of maintaining an efficient bullion
reserve. It had probably been loth to supplement its falling stock,
owing to the great expense attending such an operation. This will be
readily understood, when it is remembered that the cost of bringing gold
from London amounted then to 8 per cent or 9 per cent on the remittance.
The year 1704 is further noticeable, from the first step in the
establishment of the small-note currency, which subsequently proved such
an important factor, having been taken, by the bank then commencing the
issue of notes of the value of £1 sterling. Their circulation was,
however, very limited until after the union of the countries.

Three years after the
incident we have just narrated (1st May 1707), the legislative union of
England and Scotland was accomplished, after protracted and acrimonious
negotiation. That event is now regarded as a mutual blessing to both
nations; but it was not generally so considered at the time. Haughty and
contemptuous, the English looked on it as a means of staving off the
troublesome incursions of the northern wolves. The Scotch, on the other
hand, detested the proposition, and but for intrigue and bribery among
the members of Parliament, the Act of Union would not have passed. The
people were not, however, long in finding out the material benefits
accruing to them from federal union with their wealthy neighbours, and
from that time Scotland rapidly advanced in civilisation and commerce.
The national coinage being then in a very unsatisfactory condition, the
Bank of Scotland was entrusted with the duty of superintending its
improvement. "The Directors undertook to receive in all the Species that
were to be recoined, . . . and to issue Bank-notes or current Money for
the same, in the Option of the Ingiver of the old Species, and the Privy
Council allowed a Half per Cent, to the Bank for defraying Charges." The
bank were promised a reward after finishing the work; but, although they
preferred their claim, they do not seem to have secured its recognition.
[Historical Account of the Bank of Scotland, 1728.] The total metallic
currency of Scotland at that time has been estimated at £800,000, or,
according to one authority, £900,000. Of this, £411,117 : 10 : 9 was
brought in, in exchange for new coin. It is interesting to note that
only £239,636: 13 : 9 was native coin, the rest consisting of £132,080:
17s. of foreign and about £40,000 English coin. This operation took
place in 1707.

While this reform was in
progress, the bank got a great fright; "For in March 1708 the French
Fleet appeared at the mouth of the Firth of Forth, in the (then)
intended Invasion. At which time the Bank had a very great Sum lying in
the Mint in Ingots, and a considerable Sum in the Bank, brought in to be
recoined, besides a large Sum in current Species; all which could not
well have been carried off and concealed." [Ibid.] In 1707 the bank
first assumed the role of a bank of deposit, but did not then allow
interest on the money paid in. During the Jacobite troubles of 1715 the
bank, being suspected of favouring the Pretender's cause, fell into
disfavour with the Crown. To this is ascribed the favourable reception,
some years afterwards, of the request by the Equivalent Company to have
banking powers conferred on them, and the special recognition and
support accorded to them for long afterwards as the great rival of the
Bank of Scotland.

It does not concern us to
trace the course of the rebellion, which, indeed, does not seem
materially to have affected the country in general. But it is
interesting to observe its effects on the bank. That establishment,
despite the insignificance of its financial position from a modern point
of view, appears to have been a considerable power in the land. It would
appear that its influence was (doubtless secretly) enlisted more in the
cause of popular patriotism (according to the light of those days) than
in the interest of public order and loyalty, as these were regarded by
the dominant party. For this disaffection to King George the bank was
severely punished twelve years later; and even at the time it suffered
from the results of the rebels' action. The Town Council of Edinburgh
made successful endeavours to provide for the security of the city; but
the approach of a detachment of the Pretender's party produced so much
alarm among the citizens, that a severe run on the bank took place. It
is recorded that "the enterprise began on the part of the rebels with an
unsuccessful attempt to seize the Castle by surprise and the run on the
Bank of Scotland was so great, that they stopped payment on the 19th
September [having apparently sustained it for eleven days], and ordered
their notes to bear interest from that date." Elsewhere, however, we are
informed that "the Directors privately encouraged the Demand, lest the
Money should fall into the Hands of Enemies. But the Directors took Care
to retain the whole Cash belonging to the Government; and after all the
rest of the Money in the Bank was issued, they delivered the publick
Money; which was lodged in the Castle of Edinburgh, being about £30,000
Sterl." Tranquillity was restored by the arrival of troops from Holland
in December following. The interest-bearing notes were withdrawn from
circulation during May, June, and July 1716, "and the Directors
proceeded again in Business and Negotiations." [Historical Account.]

In that year, as the
result in all probability of the interruption of its business, it does
not appear to have paid any dividend. As this was quite an unusual
circumstance, even in those early days of the bank's history (as far as
we are aware it occurred only once before and never after), and as, when
dividends were resumed, they were at lower rates than those immediately
preceding the cessation, it would seem that the bank had suffered
considerably from the untoward train of events. The proprietors could,
nevertheless, afford to dispense with a year's dividend, seeing their
profits had been of a very substantial character. From an apparently
authentic record we find that, for the twenty-nine years ending with
1727 (the date of the incorporation of the Royal Bank), the allocated
profits averaged 17 per cent on the capital. After the first stoppage
(1704) the rate fell to 6 per cent, but it was rapidly raised again
until it reached 30 per cent, at which it stood for three years prior to
the second suspension (1715-16). In the succeeding eleven years the rate
varied from 10 per cent to 22 per cent, and the bank enjoyed an
undisturbed and lucrative monopoly. Its exclusive privileges had lapsed
in 1716, but no competitor had arisen to contest its sway in the domain
of finance. Indeed, there are indications that in those days an opinion
prevailed pretty generally that, while one bank was necessary, a
plurality of banks was unadvisable and even dangerous. The great South
Sea Bubble and the other speculative manias which in 1719-20 grievously
afflicted the English nation, appear to have had little effect on
Scotland.

The prosperity of the
Bank of Scotland did not pass unobserved. Although up to 1726 no actual
competition, other than the ineffectual attempt made by the Darien
Company, seems to have been threatened, endeavours were made by other
corporations to share their gains. One of the most curious of these was
a scheme submitted by a Mr. James Armour, writer in Edinburgh, acting on
behalf of the Royal Exchange Assurance Corporation of London. In
advancing his scheme, Mr. Armour lays great stress on the benefit to be
derived by the country from its acceptance; but it is evident from his
tone that he had some strong personal interest in the success of his
proposals. Seemingly the bank directors had turned a deaf ear to his
charming, for he issued a print of 25 pages, with the object of forcing
the scheme upon their attention, and enlisting the support of the
proprietors. This pamphlet is entitled, "Proposals for making the Bank
of Scotland more Useful and Profitable, and for raising the Value of the
Land-Interest of North Britain; Edinburgh, 1722." It is dedicated to the
Earl of Leven, Governor of the Bank, "to whom," says the author, "I'm
perswaded, what is offered with a View to serve your COUNTRY and the
BANK-COMPANY, will not be unacceptable." He then addresses the reader in
the following words:—"Being commissioned by some very Honourable
Gentlemen, as a COMMITTEE of the DIRECTORS of the ROYAL EXCHANGE
ASSURANCE COMPANY at LONDON, to offer the following PROPOSALS to the
GOVERNOR and COMPANY of the BANK of SCOTLAND, which, in my humble
Opinion, are for the Interest, not only of the BANK-COMPANY, but also of
the whole NATION, I think myself obliged to submit THEM to the
consideration of every one who will take the Trouble to examine 'EM, and
has Resolution enough to judge for himself. 'Tis in vain to write for
him, who, for Want of this Resolution, submits himself and his Concerns
to another's Conduct, without enquiring into the Reasons of Things, such
a one may save himself the Trouble of examining these Proposals, and
leave it for a Task to his DIRECTOR." He then devotes sixteen pages (in
which a peculiar taste in printing is gratified to the full by the
liberal use of large and small capitals, italics, and old English
characters) to the statement and advocacy of his proposals. He opens
with a reference to "The bad Effects of the Scarcity of Money, and a
sunk Credit" then existing; and continues, "'Twill be needless for

The deposit of £20,000
was to lie for a period of nineteen years, with option to the Assurance
Company to demand repayment on twelve months' notice, but with no option
to the bank to repay of their own accord. As the bank had been paying
dividends of 20 per cent on the first instalment of £10,000 of their
capital, and of 5 per cent on the second instalment of the same amount,
the sum of free profits specified was to preserve that position. Further
profits, including those to be derived from the use of the Assurance
Company's money, were to be divided equally between the bank and the
company. The exchange business was to be kept separate, one per cent
commission to be charged, drafts to be payable at sight, each party to
pay their own expenses, and the profit to be divided equally.

Our author seems to have
had doubts as to the acceptance of his scheme, for, towards the end of
his pamphlet, he expresses himself thus gloomily and sarcastically: "I
know that very often the most useful Proposals" [he has long before this
exhausted his stock of special types] "have been treated with the
greatest Contempt; but a Man that has any Share of good Sense, must
perceive how absurd this conduct is. If the World had been always averse
to new Discoveries, we had been still as Barbarous as the most ignorant
of our Ancestors" [a most profound depth surely], "and sure, one can't
read the Proposals now offer'd with any Degree of Attention, but he must
be ready to think, they will be Accepted with Pleasure, unless" [here
comes the sting] "this is sufficient to Reject them that they are made
feasible, and for the publicic Good."

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